I’m one of those people who appreciates credit cards (especially cash back credit cards) as great tools that can benefit our finances when used wisely. For those who are carrying a balance on their cards and who are interested in how to pay off credit card debt more efficiently, one popular strategy is to find ways to lower your interest rates on your existing balance.
Being more frugal and developing a budget are great ways to get rid of debt, but how about focusing on credit cards themselves as tools to help us eliminate our debt faster? The fact is, you can get “cheaper debt” or retire your debt much faster simply by getting a better interest rate on it. Shifting your existing balance to 0% APR credit cards or low interest credit cards is certainly one way to do it.
Here are some tips and guidelines for doing a balance transfer that I hope will prove helpful:
Facts And Tips On Making A Balance Transfer
1. Compare credit card offers.
There are still some companies out there with balance transfer deals worth checking out. While many cards will give you both a 0% introductory APR for both balance transfers and purchases, not all of them will extend this offer. Some cards may only give you a 0% promo APR for new purchases but charge you a low rate for an existing loan transfer. The good news is that there are still a lot of attractive options out there, which we’ve culled together and made available through our credit card directory. Here is a sampling of some cards in this category:
2. Realize the limits of balance transfer deals.
I remember the days when balance transfer offers would overflow my mailbox. These days, I see nary a piece of mail from credit card companies — they’re fewer and farther between. When credit was flowing so freely not too long ago, lifetime balance transfer cards were the rage, which are cards that provide a low interest rate upon transfer. The low rate remains in effect throughout the life of the balance. Unfortunately, this sweet deal became the downfall of companies like Advanta, which were forced to close credit card operations due to the cost of maintaining these card programs. Needless to say, balance transfer credit cards are now available only with more restrictive terms: 0% for a limited time (6 to 12 months), a balance transfer fee with no ceilings, higher rates when the promotional period is over.
3. Know how balance transfers work.
Balance transfer cards work as follows: they have a promotional period during which you’ll get a 0% or very low rate for a certain number of months, but once that period is over, rates are adjusted to much higher levels (perhaps to undesirable levels). Not only that, to do a transfer, you may have to pay a certain fee (typically 3%) for the privilege of owning such a card. If you believe you can pay off your balance quickly (within the limits provided by the program) or if you’re certain you’ll be paying less in charges over time by using your new card, then doing the switch will be worth it. Check this balance transfer card calculator to see how much you can save with a balance transfer card!
Warning: Although you may think you will save more money over time by switching to a new card, note that the terms and rules imposed by credit card companies are never permanent and may be changed at any time.
4. Be careful about leveraging balance transfer cards.
Credit card arbitrage is the practice of borrowing money from your credit card and depositing the borrowed funds in some vehicle that returns you higher interest than you need to pay for maintaining your loan. It was all the rage when 0% balance transfer credit card offers were a dime a dozen. There are people who rake in good money using this strategy, but I won’t be joining this game anytime soon. This may only be worth doing if:
- You use cards with high enough credit limits to allow you the volume to generate returns that make the hassle of doing this worthwhile.
- The earnings you get from this scheme are far beyond the costs incurred (from the card program itself and from the potential effect on your credit score).
- You’re a very organized and disciplined person who’s able to track and manage the funds involved. And you actually enjoy doing this.
5. Ask the right questions before signing up.
Get some points of comparison. Size up your options by asking some questions before you apply for a card. At least, find out the basics: how long is the promotional period for? What kind of fees will you incur for late or missed payments? How is your credit card payment applied against your debt?
6. Weigh the effects of doing a transfer.
I will reiterate here that before you switch your balance onto any card, make sure you know the costs and risks of doing so. For instance, aside from the pesky balance transfer fee you’ll pay, there’s also the credit card pull that can affect your credit score whenever you apply for a new card. If you’re going to be in the market for a mortgage or some other big loan sometime soon, it’s best not to risk changes to your credit standing within a few months to a year of this big loan application.
7. Know when to use your balance transfer card.
Use your card wisely! Know how your payments will be applied against your debt; card companies will usually apply your monthly payment towards recent purchases first, then towards your balance transfer fee and finally to your actual transferred balance. So the advice? Use separate cards for spending on new purchases and for your balance transfer to ensure your payments are applied optimally. I’d also steer away from using the balance transfer card so liberally: for instance, avoid expensive cash advances because of the high fees and rates involved!
8. Close out your old cards with care.
Once you’ve switched your balance to a new card, you may debate the possibility of closing your old card accounts. I personally prefer keeping as few accounts as I can get away with because I don’t like financial clutter. But there are caveats to this; I’d tread carefully so that I don’t accidentally harm my credit score in the process.
9. Be aware of card requirements you need to uphold.
Don’t assume that just because you don’t buy anything using your new balance transfer card doesn’t mean you’re off the hook with monthly payments. If you’ve got a balance, you’ll be required to pay a minimum each month towards your debt. Making the wrong assumptions about your program’s requirements can cost you extra in penalties, so read the terms carefully.
10. Look for alternatives if you aren’t approved!
You may decide to apply for a new balance transfer credit card, but with tighter credit all around, don’t be surprised if your application is rejected. If this happens to you, you can always do the next best thing: if you’ve got several credit cards, transfer as much of your balance from high interest rate cards to your existing cards with relatively lower interest. Again, check if this is worth doing (based on cost). Just be careful that you don’t go over your credit limit for any card while you’re performing the transfers.
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